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Prices of Treasury coupon securities continues their resurgence in overnight trading. I am sure that many (myself included) did not anticipate that the 30 year auction would go off without a hitch and now many of those investors are buyers on dips rather than sellers on rallies. (Someone criticized my use of the investors the other day. Substitute or add traders and speculators if you choose.) In addition the backdrop from the mortgage world changed as substantial buying developed in that sector. The salient point is that the 4.00 level held twice and yields in the mid 3.90s attracted buyers. Some may attack those purchases but for now the market is unequilibrium and we know at what level it clears.

Overnight the Finance Minister provided the US bond market with his personal blessing and imprimatur. A Bloomberg story notes that he described his faith in the US as “unshakable”.

Eurozone Industrial Production declined 1.9 percent in April and that was a cool 21.6 percent plunge on a year over year basis.

There is one noteworthy piece of economic data here as we receive preliminary June confidence data. The consensus expects a small increase to 69.5 from 68.7.

The yield on the 2 year note has edged lower by 2 basis points to 1.30 percent. The yield on the 3 year note dropped 4 basis points to 1.92 percent. The yield on the 5 year note tumbled 6 basis points to 2.79 percent. The yield on the 7 year note declined 5 basis points to 3.43 percent. The yield on the 10 year note fell 6 basis points to 3.80 percent and the yield on the Long Bond also fell 6 basis points to 4.64 percent.

The 2 year/5 year/30 year spread is 36 basis points after finishing yesterday at 32. Recall that yesterday it closed around 32 and earlier in the week traded as cheaply as 17. The movement in that spread in this direction signals that the 5 year note is performing better on spread than the 2 year note and the 30 year bond. It is a sign that the hedging of mortgage product has abated as the selling of that product led to the crushing of the belly versus the wings.

The 2 year/10 year spread is 150 basis points.

The market has bounced significantly from the high yield and trades quite well. To what levels might it probe and where might resistance develop? The proximate cause of the last leg of the down trade was the rosy employment data last Friday. As has been my custom for many years I recorded the yield levels which prevailed in the moments before that report hit the tape.

The 2 year yield was 0.97 percent and the 3 year yielded 1.53 percent. The 5 year yielded 2.59 and the 10 year yielded 3.73 percent. The Long Bond rested at 4.59 percent.

I think this current uptrade will run into resistance at 3.73 on the 10 year and 4.59 on the Long Bond.

I also believe that the Federal Reserve will reaffirm its ZIRP and that over time the 2 year note will return to some yield below 1 percent.

Libor: Libor probing lower as it opens at 0.62438 versus 0.62938 yesterday.

FOMC's Next Move

The Wall Street Journal reports that the Federal Reserve is unperturbed by the recent rise in rates and views it as part of the market's acknowledgement of a recovering economy. The author asserts that the FOMC will not increase the amount of purchases at its next meeting. The story also notes that the Fed does not quite know how to balance the potential down-the-road inflation effects against what will be a stubbornly high unemployment rate.

Source: Bond Expert: Friday Outlook